In the 1980s the US portrayed Japan as a grave economic threat. Now China is their new villain when they should be looking squarely in the mirror, Stephen Roach argues

In the 1980s the US portrayed Japan as a grave economic threat. Now China is their new villain when they should be looking squarely in the mirror, Stephen Roach argues

When governments permit counterfeiting or copying of American products, it is stealing our future, and it is no longer free trade.” So said US President Ronald Reagan, commenting on Japan after the Plaza Accord was concluded in September 1985.

Today resembles, in many respects, a remake of this 1980s movie, but with a reality-television star replacing a Hollywood film star in the presidential leading role – and with a new villain in place of Japan.

Back in the 1980s, Japan was portrayed as America’s greatest economic threat – not only because of allegations of intellectual property theft, but also because of concerns about currency manipulation, state-sponsored industrial policy, a hollowing out of US manufacturing, and an outsize bilateral trade deficit.

In its standoff with the US, Japan ultimately blinked, but it paid a steep price for doing so – nearly three “lost” decades of economic stagnation and deflation. Today, the same plot features China.

Notwithstanding both countries’ objectionable mercantilism, Japan and China had something else in common: They became victims of America’s unfortunate habit of making others the scapegoat for its own economic problems.

Like Japan bashing in the 1980s, China bashing today is an outgrowth of America’s increasingly insidious macroeconomic imbalances. In both cases, a dramatic shortfall in US domestic saving spawned large current-account and trade deficits, setting the stage for battles, 30 years apart, with Asia’s two economic giants.

When Reagan took office in January 1981, the net domestic saving rate stood at 7.8% of national income, and the current account was basically balanced. Within two and a half years, courtesy of Reagan’s wildly popular tax cuts, the domestic saving rate had plunged to 3.7%, and the current account and the merchandise trade balances swung into perpetual deficit. In this important respect, America’s so-called trade problem was very much of its own making.

Yet the Reagan administration was in denial. There was little or no appreciation of the link between saving and trade imbalances. Instead, the blame was pinned on Japan, which accounted for 42% of US goods trade deficits in the first half of the 1980s. Japan bashing then took on a life of its own with a wide range of grievances over unfair and illegal trade practices. Leading the charge back then was a young Deputy US Trade Representative named Robert Lighthizer.

Fast-forward some 30 years and the similarities are painfully evident.

Unlike Reagan, President Donald Trump did not inherit a US economy with an ample reservoir of saving. When Trump took office in January 2017, the net domestic saving rate was just 3%, well below half the rate at the onset of the Reagan era. But, like his predecessor, who waxed eloquently of a new “morning in America,” Trump also opted for large tax cuts – this time to “make America great again.”

The result was a predictable widening of the federal budget deficit, which more than offset the cyclical surge in private saving that normally accompanies a maturing economic expansion. As a result, the net domestic saving rate actually edged down to 2.8% of national income by late 2018, keeping America’s international balances deep in the red – with the current-account deficit at 2.6% of GDP and the merchandise trade gap at 4.5% in late 2018.

And that’s where China assumes the role that Japan played in the 1980s. On the surface, the threat seems more dire. After all, China accounted for 48% of the US merchandise trade deficit in 2018, compared to Japan’s 42% share in the first half of the 1980s.

But the comparison is distorted by global supply chains, which basically didn’t exist in the 1980s. Data from the OECD and the World Trade Organization suggest that about 35-40% of the bilateral US-China trade deficit reflects inputs made outside of China but assembled and shipped to the US from China. That means the made-in-China portion of today’s US trade deficit is actually smaller than Japan’s share of the 1980s.

Like the Japan bashing of the 1980s, today’s outbreak of China bashing has been conveniently excised from America’s broader macroeconomic context. That is a serious mistake. Without raising national saving – highly unlikely under the current US budget trajectory – trade will simply be shifted away from China to America’s other trading partners. With this trade diversion likely to migrate to higher-cost platforms around the world, American consumers will be hit with the functional equivalent of a tax hike.

Ironically, Trump has summoned the same Robert Lighthizer, veteran of the Japan trade battles of the 1980s, to lead the charge against China. Unfortunately, Lighthizer seems as clueless about the macro argument today as he was back then.

In both episodes, the US was in denial, bordering on delusion. Basking in the warm glow of untested supply-side economics – especially the theory that tax cuts would be self-financing – the Reagan administration failed to appreciate the links between mounting budget and trade deficits. Today, the seductive power of low interest rates, coupled with the latest strain of voodoo economics – Modern Monetary Theory – is equally alluring for the Trump administration and a bipartisan consensus of China bashers in the US Congress.

The tough macroeconomic constraints facing a saving-short US economy are ignored for good reason: there is no US political constituency for reducing trade deficits by cutting budget deficits and thereby boosting domestic saving. America wants to have its cake and eat it, with a health-care system that swallows 18% of its GDP, defense spending that exceeds the combined sum of the world’s next seven largest military budgets, and tax cuts that have reduced federal government revenue to 16.5% of GDP, well below the 17.4% average of the past 50 years.

This remake of an old movie is disconcerting, to say the least. Once again, the US has found it far easier to bash others – Japan then, China now – than to live within its means.

This time, however, the movie might have a very different ending.

Stephen S. Roach, a faculty member at Yale University and former Chairman of Morgan Stanley Asia, is the author of Unbalanced: The Codependency of America and China. Copyright: Project Syndicate, 2019, published here with permission.

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Fair points but one can equally reflect on the pros and cons of doing nothing. Seems the people are restless, something doesn't add up.

Savings for idiots - America knows that.
Trade pixelated currency for real stuff and run deficits.
The only thing you must ensure is ALWAYS be the reserve currency for Oil.

Unfortunately, though all good times come to an end.
Kunstler sums it up nicely here

""The race to economic collapse is an international competition sparking threats and tensions summoning the specter of war. The imploding center of this collapse is that of industrial technocracy based on fossil fuels. ..Following a dumbed-down media unable to parse the delusions du jour, one might think, for instance, that the USA and China are engaged in a symbolic battle for the heavyweight championship of the world. Rather, both are freaking out at a prospective decline in activity that will make it impossible to support their current populations at even close to the levels of comfort they had lately achieved.

..The US and China are actually more like two passengers of a sinking ship racing to swim to a single lifebuoy — which is drifting ever-beyond the reach of both desperate parties on a powerful current of history. That current is the one telling nations quite literally to mind their own business, to prepare to go their own ways, to strive somehow to become self-sufficient, to finally face the limits to growth, to simplify and downscale all their operations.

Alas, the US and China — and everybody else — will apparently be dragged kicking and screaming to those transformational recognitions. (Thus, the agonies of Brexit.)

While it is true that the US has some structural economic issues, these are not mutually exclusive of the fact that China cheats, steals, and is on neo-colonial path. Let's not kid ourselves, we have entered a new cold war and China is far more dangerous than the Soviet Union. The Soviet Union could never compete with our goods and services but China can. We will entering a world where authoritarian dictatorships could appeal to nations if still deliver the goods - we will have to make a choice. However, in every war there are always useful idiots like Mr. Roach.

I am sure that all NZ dairy farmers, sheep and beef farmers, horticulture farmers, forestry owners, fishery crews, tourism operators, educational institutions are friends with China.

You are welcome to start your personal cold war with China but do not drag the rest of NZ with ya.

Good luck.

It's not our making; China has decided to do this and we have no choice but to take the real threat serious. Either we can remain a free and independent nation or we become a colony of China. I am sure all the so-call friends of China will realize that the price of "friendship" is far too high.

Some recent historic facts:

In 1996 Taiwan straight crisis, China was denied for using GPS for any military operations. Then, Bei Dou, along with GPS and Galileo, was the third global navigation system being built.

In 2007, China was denied to be a partner in the International Space Station program. Then, Tian Gong I and II was launched in 2011 and later.

In 2019, Huawei was denied to use computer chips and operation system. Then, ..... Well, I am sure exciting things will soon happen.

The US needs to adapt itself to the world in which it is no long the number one.

Rare for us to agree. America should be contemplating its relative decline. My British forebears made that mistake about 1870 and went headlong into an arms race leading to WW1. If USA started thinking about its own obstacles to greater prosperity instead of its rivals catching up the world would be safer.

You seem to sugest China (?) will surpass them as number 1?
With what energy source?

China will never be number one. Demographics will see to that. They will never reach the standard of living that the US has.

i would say energy/resource limits guarantees they wont

Demographics means India wins! Well until Nigeria takes over Africa.

I don't agree with the commentators who push the energy is the only thing that matters but maybe it mattered more when man-power was people with spades working from dawn to dusk 365 days a year. But an average person in a developed country uses 500 times as much fossil fuel energy as they can produce working out in a gym so economic success for a country means effective use of people not the number of them. If China can dump the communist party and install a govt that admits its mistakes then it is quite likely they would succeed.

BTW - isn't no1 country the happiest? There is more joy in some impoverished 3rd world villages than most developed countries. Oxford university used to have the highest suicide rate in the UK - that it what it means to be elite.

You have a point, the number 1 I was meaning, was living standard.

Economic success actually means to maximise your waste! Thats what consumption and (ironically named) economics is about.
And all consumption is energy derived.
As energy issues have arose, we have use Debt as an energy proxy to keep maximising (waste)... its called growth.

"Well, I am sure exciting things will soon happen" Well the US nearly brought ZTC mobile company to its knee late last year, until the last minutes reprieve from US Govt and Google. Don't underestimate how much Google has invested in their OS. It will take years and decades for Huawei to start from scratch. Just imagine having to build up the map application again and no doubt they can't just buying the data from third (most likely US) companies.

They could mostly use free data. Traffic and POI data would need to be added, but they wouldn't be that hard to source either.

Huawei would have a lot of work to do to start from scratch but there's a double-edged sword there - if you force them to go down that path then you've just created a very able and well-funded competitor. And there's plenty of non-financial reasons for them to take that course too.

May well be but that trust issue will take many decades to get rid off, being Huawei what else is being installed?

The hypocrisy is astonishing. Preach human rights, biggest trading partner interns millions of ethnic minorities. If the US people want to 'make America great again' they indeed need to look in the mirror and start producing what they consume.

There is a massive geopolitical difference

Completely agree with comments from "Nofax"... repeated below.....

"While it is true that the US has some structural economic issues, these are not mutually exclusive of the fact that China cheats, steals, and is on neo-colonial path. Let's not kid ourselves, we have entered a new cold war and China is far more dangerous than the Soviet Union. The Soviet Union could never compete with our goods and services but China can. We will entering a world where authoritarian dictatorships could appeal to nations if still deliver the goods - we will have to make a choice. However, in every war there are always useful idiots like Mr. Roach."

I'm for and against this article. The current Health care system in the US is unsustainable, and is dragging the economy down. Obamacare is ostensibly to extend coverage to everyone, but it also relieves the burden on employers, whose healthcare commitments to their employees are making US businesses less competitive globally. A tradewar with China diverts attention from the crises within the US economy.

On the other hand, China is underhanded, stealing secrets etc and using nefarious means to get to the top. Yeah it deserves to be at the top table, but does the end justify the means?

One step on from that - practically can China be at the top table? Maybe it deserves to because of its size and power etc, but the postwar US dominated global system has prevented any major global conflicts for 70 years. Do we want to risk that?

I would not trust any nation that has as much power as the US or China. I think the might of their size is exactly the problem. You do not have to choose either or, you can keep both at arms length.

Power corrupts. China and USA approach NZ with a smile and a promise of trust and friendship. They may mean it but didn't the English do the same 180 years ago and Maori ended up as 2nd class citizens. It is the elephant and the mouse - only the mouse needs to worry.